Kindred sets aside funds to settle RehabCare case as it revamps its business

Kindred Healthcare has set aside $95 million in a contingency reserve to fund a possible settlement involving its RehabCare division.

The one-time charge in its first-quarter earnings report was one of a number of one-off challenges that continue to rankle the post-acute-care provider, which has been shifting its business strategy and growing aggressively through acquisitions.

RehabCare, which Kindred acquired in June 2011, has been under investigation by the U.S. Justice Department for allegations that it improperly billed Medicare for services provided in skilled-nursing facilities. The investigation also centers on whether RehabCare had an improper relationship with a vendor in violation of the anti-kickback statute.

Rehabilitation and home healthcare were two areas of focus that Kindred highlighted in 2013 as it began to shift away from skilled-nursing care and into more profitable service lines. In the first quarter, it completed two acquisitions on these fronts: Gentiva Health Services, a home health and hospice operator, and Centerre Healthcare Corp., which operates inpatient rehabilitation hospitals.

Kindred's $1.8 billion deal for Gentiva came after a drawn-out takeover fight. The combination will now allow Kindred, with its broader array of services, to experiment with care coordination and risk-based payment models.

The company is ahead of previous projections in achieving cost savings from the merger, Breier said. “I'm happy to report we're making great progress on this front,” he told analysts and investors.

With its two acquisitions, Kindred's revenue increased 32% to nearly $1.7 billion from $1.3 billion in the first quarter of 2014. However, it finished the quarter with a net loss of $146.8 million compared with the prior-year period's $8 million in net income.

Analysts described the quarter as “noisy” because the company exceeded revenue expectations, but its results were dragged down by the settlement reserve as well as contract losses in its skilled-nursing rehabilitation services sector. Other items included a temporary hold on admissions at four of its California long-term acute-care (LTAC) hospitals and costs associated with the retirement of CEO Paul Diaz.

But Breier said the company is moving forward with greater regulatory clarity than it has in the past, singling out for instance Medicare reimbursement changes for LTAC operators, which will take effect in October.